Auction-rate bond crisis bodes ill for non-profit providers

Auction-rate bond crisis bodes ill for non-profit providers

Ratings agencies like Standard & Poor's don't yell "fire!" in a crowded theater--after all, it would violate their air of gravitas if nothing else. But even S&P had to admit, this week, that the rapidly-descending crisis in auction-rate bonds is a growing concern for not-for-profit healthcare providers. While S&P characterizes the auction-rate problem as a "threat," as I see it this could soon devolve into an emergency.

For one thing, healthcare borrowers are being zapped by rapidly-rising bond interest rates, in much the same way that subprime borrowers have been by skyrocketing rates on ARMs. If not-for-profits put bonds up for sale, and no one bites, rates can shoot through the roof. In a telling recent example, when the Port Authority of New York and New Jersey put $100 million of bonds on the market, and buyers didn't pick up the whole offering, interest rates  on the issue shot up from 4.3 per percent to a credit-card-like 20 percent.

More frighteningly, the Port Authority isn't alone. In fact, 87 percent of all auctions in the $330 billion auction-rate bond market failed on Thursday of last week for lack of buyer interest. Meanwhile, reports suggest that major investment houses like UBS and Merrill Lynch have decided not to back any auction-rate bond that isn't fully subscribed. As I see it, we're talking a panic here. And unless bond insurers improve their own credit ratings, we're nowhere near the bottom of the slide yet.

As you'll see below, some state authorities (such as those in Massachusetts) are trying to ease the pain a bit by relaxing standards for re-issuing such bonds. And some providers, for now, are simply sucking up the added weekly interest costs and hoping the market will turn.

But most are trying desperately to get out from under the auction-rate bond burden. Take the University of Pittsburgh Medical Center, which is losing as much as $500,000 a week on its $430 million in bonds despite having AA-rated credit. "It's outrageous," Tal Heppenstall, UPMC's treasurer, told Bloomberg. "We're a AA-rated credit. We don't need to get financing from loan sharks."

The truth is, though, that even the relatively prosperous UPMC may just have to swim with the sharks for awhile if it doesn't succeed in refinancing its debt. And for the foreseeable future, hospitals that trail blood in the water may just get eaten. - Anne

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